Mass sale of structured products by unqualified salespeople a disaster in the making

6 October 2015

The unmonitored sale of structured products by often unqualified product salespeople to investors, is a potential disaster in the making, according to AES International.

Data from the European Securities and Markets Authority, shows that 1.3 million(1)structured retail products were sold in Europe last year, meaning the total number of products “outstanding” had risen to 2.26 million by the end of 2014. In monetary terms, European investors had around €647.4bn in structured products waiting to mature at the end of last year.

In some parts of Europe, such as the UK, the sale of structured products is relatively closely monitored by regulators. However, in other areas of Europe and beyond, many of the people selling these products are completely unqualified and ill-equipped to explain the full risks of the products investors are purchasing. This includes many of those working in banks and those who claim to be able to offer financial advice.

Complex instruments

David Norton, head of investments at AES International, said: “Structured products help manage specific risks at an institutional level, but are complex instruments and rarely suitable for retail investors.

“There are many people who are completely unaware of how complex the products they own are and therefore the risks inherent in them. The risk isn’t always that the investor will lose money, it is rather that the returns are nowhere near what they expected.

“The products are often sold to investors based entirely on the ‘best case scenario’ and sometimes even the salespeople themselves are unaware this is not a guaranteed return.”

Terms such as 'protection barriers' and 'capital guarantees' give a false impression of what is offered and when this is badly explained the consequences can be disastrous.

In the UK, this mis-match between what investors expect and what they receive has led to a number of fines. Outside the UK however, the sale of the products is seemingly rampant, with almost all offshore financial salespeople suggesting investors buy them, frequently due to the high commission payments available on them.

David Norton added: “We anticipate some very disappointed investors in the years to come as these products mature and significantly underperform expectations. Perhaps more can be done, in Europe at least, to ensure those who are selling these products are able to fully explain the potential outcomes – in real terms – to investors.”